How to Avoid Paying Income Taxes—Legally
Loopholes and tax breaks favor big corporations
But how hellish is Wisconsin's tax policy for SC Johnson, a multibillion-dollar corporation with 12,000 employees and globally recognized products such as Pledge and Ziploc bags?
According to an investigation by the Institute for Wisconsin's Future (IWF), the Racine-headquartered SC Johnson hadn't paid a dime in state income tax between 2000 and 2008—even though its annual sales reportedly exceed $8 billion.
Since SC Johnson is a privately held company, it does not have to disclose its sales, profits or tax filings.
But it has filed income tax returns in Wisconsin. IWF's research director, Jack Norman, said they show that the company had paid no state income tax between 2000 and 2008, the last available return. No other information is available to the public.
Two public companies controlled by Johnson family members—Diversey and Johnson Outdoors—also paid no taxes during the same period, according to IWF's research.
Diversey Inc., which provides commercial cleaning services and is being sold to Sealed Air Corp. for $4.3 billion, paid no state income tax between 2000 and 2009, despite earning $360 million in pre-tax profits in the same period.
Johnson Outdoors, which manufactures recreation products, paid no state income tax on pre-tax profits of $42 million between 2000 and 2008.
In contrast, Johnson Bank, which is also controlled by the Johnson family, has paid $3 million in state income taxes on profits of $219 million between 2000 and 2009. As IWF pointed out, that's a tax rate of 1.4%, far below the state tax rate of 7.9%.
“I think we can take away from this that this is a company that is very aggressive about pushing the line on taxes,” IWF's Norman said.
How Do They Do It?
Based on the limited information the company releases publicly, Norman said there is no evidence that SC Johnson is doing anything illegal to eliminate its tax liability in Wisconsin. But he said that tax loopholes and tax credits given to big corporations allow them to legally reduce—or in SC Johnson's case, completely eliminate—their state income taxes, despite apparent profitability.
SC Johnson's public affairs manager, Stephanie Jarstad, did not respond to the Shepherd's questions on IWF's investigation. But Jarstad did send a general statement about the company's tax payments.
“SC Johnson has not owed Wisconsin state income taxes for the last several years due to a 1984 Wisconsin R&D [research and development] tax credit, which encourages companies to move R&D jobs to the state,” Jarstad's statement reads.
Former Gov. Jim Doyle increased that tax credit in 2009, with the Super Research and Development Tax Credit.
Jarstad also noted that state income taxes are based solely on the sale of SC Johnson products in Wisconsin. Based on those sales, “the company's maximum tax obligation would be less than $500,000 absent any tax credits or deductions.”
SC Johnson's Wisconsin employees paid more than $15 million in personal income taxes last year, and the company paid more than $3 million in state sales and use taxes and almost $3 million in property taxes, according to Jarstad's statement.
Jarstad did not respond to the Shepherd's specific questions about SC Johnson's tax payments, the last time the company's income tax filings were audited, or whether the company's lack of income tax payments was fair.
Shifting Profits to Other States
Can an R&D tax credit completely eliminate a multibillion-dollar corporation's tax liability in the state in which it's headquartered? Possibly, but not probably.
It's more likely that SC Johnson also is using other strategies to reduce its tax payments in Wisconsin. If so, SC Johnson would not be unique in doing this, although these strategies are usually not utilized by your typical mom-and-pop small business.
IWF's Norman said one common tax-reduction strategy is to shift a company's profits into a subsidiary that's headquartered in a state with no corporate income taxes—such as Nevada—or with a company-friendly tax exemption.
For example, Norman said, Harley-Davidson set up a subsidiary to own all of its valuable, globally recognized trademark rights. Anytime a trademarked Harley logo or image is used, royalties are paid to this subsidiary.
While Harley is headquartered in Milwaukee, this subsidiary is based in Ann Arbor, Mich. Why? Because Michigan had created a tax exemption for profits made on “intangibles” such as trademarks, Norman said.
However, Norman noted, Harley-Davidson uses this tax exemption to reduce its tax liability—not to zero it out, as SC Johnson has for years.
Norman said he wasn't sure if SC Johnson used this loophole to eliminate its taxes. But he wouldn't be surprised if it did, since it owns valuable consumer brands such as Windex, Pledge, Glade, OFF! and Ziploc.
“Harley-Davidson disclosed it,” Norman said. (Harley-Davidson is a publicly traded company; SC Johnson is privately held.) “In the case of SC Johnson, it's totally secret. We really don't know exactly what techniques they used.”
SC Johnson's Jarstad did not respond to the Shepherd's request to comment on the company's possible use of a subsidiary for its trademarks and logos.
Can Wisconsin Fully Collect Corporate Taxes?
Can Wisconsin recoup some of the money from profits shifted to another state? Perhaps, according to the Institute for Wisconsin's Future's ongoing research on the state's tax climate.
The Democratically controlled state Legislature passed combined reporting in 2009 so that companies like SC Johnson would have to pay some taxes on profits earned in other states. But Gov. Scott Walker has created new loopholes in the combined reporting law to allow corporations to reduce their income taxes paid in Wisconsin.
One Walker-written tax loophole allows all subsidiaries of a corporation to use one subsidiary's loss to reduce their profits—and, therefore, their income taxes. The nonpartisan state Legislative Fiscal Bureau estimated that the loophole would reduce tax collections in our state by at least $46 million by the end of 2013.
Another Walker loophole bans the state Department of Revenue from challenging a corporation's organization for tax purposes. Previously, a corporation could not tie together subsidiaries solely for the purpose of avoiding taxes. But thanks to Walker's changes, a corporation can organize itself so that it reduces or eliminates the income taxes paid in Wisconsin—and the state cannot object to it.
The Legislative Fiscal Bureau could not estimate how much revenue the state would lose once companies take advantage of this new loophole.
Comment on this article at expressmilwaukee.com.n
-- Personal income tax is on our GROSS take, not much can be deducted, not much of the costs of living life in America. Can't deduct my food, my energy bills, my clothing. Can only deduct a tiny part of housing costs. I cannot deduct cleaning supplies or hiring a maid.
-- Business tax on the other hand, is on their EXCESS take (profits), not on their gross. They can deduct the cost of doing business, pretty much all of them. They can deduct the materials they consume, the wages they pay to employees, the services they buy from others. Business can deduct janitorial costs.
You will notice that while ducking out of state income tax, they did not duck out of sales and use tax or local property tax. When they buy paper and pens for the office, they still need to pay sales tax like the rest of us do. If they were putting those paper and pens into the products sold, then they would not pay sales tax on it, that is collected when us retail customers buy that product.
Nor do they duck out on the personal income tax that comes from their employees. They must pay the employees higher here because of that personal income tax on employees wages. No wonder a business would rather hire an illegal immigrant! (Yes, the business segment of Republicans want immigrant amnesty more than the liberals do! Reward them for successfully displacing a higher compensated US citizen.)
Can I use R&D tax credits to deduct the cost of developing an affordable lifestyle? Can I us it to pay for my attempted trials, whether I succeed or not? I doubt it.
It has always amazed me at how drug companies can write off the cost of R&D, perhaps the "research" is on how best to market their products, not merely on the development and testing costs of the drugs themselves. My understanding, the drugs have already been created, now it is up to how to craft the message, how to write all the legal disclaimers, the side-effects fine print, whatever is needed to get the FDA to permit sale for human usage.
The "Las Vegas Loophole", or shifting the profits to a state that does not tax them. Can I avoid my Wisconsin taxes by having residence in Nevada, Florida, Alaska, or some other state with no personal income tax, even though I lived and worked in Wisconsin? Not likely, I doubt Wisconsin would recognize my being a Nevada resident if I am not spending at least 6 months there.
On the federal level, US corporations incorporate themselves in some place like Bermuda or Ireland, using the same dodge. Yet, all the officers have their offices in Houston, since Texas does not collect a state personal income tax. They still want life in America, huh?
"Combined Reporting" -- perhaps this should be reformed to work like coordination of health insurance benefits. To prevent someone from "double-dipping", health insurance use the birthday rule. The spouse that had an earlier birthday (mm/dd only, skip the year), would get the first crack at reimbursement, the 2nd spouse's insurance would then kick in with full knowledge that the first had already paid, so would not need to pay that part. Maybe Wisconsin would deduct the portion that was already paid to the other state (deducting zero in the case of a zero state like Nevada).
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What does this really mean? Don't waste time taxing business AT ALL, because they can move out, will go to the lowest tax place then can. Or at least they will raise prices, so we the customer ends up paying their tax. Instead, get all the taxes from us in the form of personal income tax. Use a graduated PERSONAL income tax that taxes the super rich at a much higher percentage. This would do 2 things, make it so business has no need to use tax avoidance schemes, no need to re-locate the business elsewhere. 2nd, the top execs would find it wasteful to pay themselves so much, it would be lost in taxes anyway. More incentive to keep the money in the business, pay themselves in stock options instead. They will then run the business in a way that keeps the share value high, so they can make money on the capital gains when selling the stock later.
And then stop those dang corporate subsidies for corn, tobacco, oil and such. Not paying a corporate income tax should be worth more than the subsidies. Plus there would be no more need to incorporate in Bermuda on the federal, no more need to claim income in Nevada to avoid Wisconsin taxes. Maybe then the workers in Wisconsin could be paid better, and the state will get their money on the personal income tax of the workers.
Of course, capital gains should be taxed as regular income like W-2 wages, just give it a "capital gains standard deduction" of maybe $200K so that they can live comfortable, but not get carried away. This would benefit the retirees who are no longer working.